The Coffee Stock that’s Become a Leading Market Indicator

leading market indicatorMany analysts and economists have their favorite stocks they follow as leading indicators of the economy. General Electric Company (NYSE/GE) is a perfect example. Because GE is so big and so diversified, its stock is often looked at as a leading barometer of how the general economy is faring. The old saying used to be, “If all is well with GE, all is well with the economy.”

But times have changed. Many industry-specific stocks have become a good gauge of future economic activity. Seasoned readers know I like to look at the stock chart of Coach, Inc. (NYSE/COH) and other high-end specialty retailers to see how the luxury market is faring, because if the middle class is spending, it’s obviously a good thing for the economy.

In recent years, I’ve become a big fan of the Starbucks Corporation (NASDAQ/SBUX) stock as a leading indicator of the stock market and the economy.

Looking at Starbucks’ stock chart, one can easily determine that this stock has led the general stock market and economy for years. Starbucks’ stock topped out in October/November of 2006. Twelve months later, the Dow Jones Industrial Average topped out (October 2007). Starbucks’ stock hit bottom in October of 2008. The general stock market hit its bottom six months later, in March 2009. (I follow a lot of stocks; it’s eerie how well Starbucks stock leads the market.)

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So what’s Starbucks’ stock saying about the market and economy right now? It’s saying only good things.

With the Dow Jones Industrial Average breaking to a new high yesterday, the market is at its highest level since September 2008—when Lehman Brothers filed for bankruptcy. On the other hand, Starbucks’ stock is at its highest level since April 2007 and shows no signs of easing. Again, Starbucks’ stock is leading the market higher.

Thursday, Starbucks reported a profit of $279 million on sales of $2.84 billion in its latest quarter. (You’d think a company could get more than 10% profit when its core products are made from coffee and water.)

But it was the same store sales at Starbucks that were of most interest to me. The company said that sales at stores open more than one year rose eight percent in its latest quarter. This gives credence to my theory that consumers are slowly opening those wallets up, a good thing for the economy.

As soon as I see that Starbucks’ stock starts to head lower, I’ll be notifying my beloved PROFIT CONFIDENTIAL readers. But for now, it’s more of the same. Enjoy the market rally while it lasts.

Michael’s Personal Notes:

Back on October 6, 2010, I wrote a lead article in PROFIT CONFIDENTIAL that said one morning, we would wake up to a news headline that gold bullion prices had jumped $100.00 in a single day.

Yesterday, half that prediction came true. Gold bullion for December delivery jumped $45.50 an ounce Thursday. The media can blame it on the Fed’s quantitative easing. I’m blaming it on a government spending about $125 billion a month more than it takes in during the month, jeopardizing the currency it prints on ever faster and faster printing machines.

Seasonally, the period from October to December has traditionally been the best for gold bullion. Let’s enjoy this ride, too! But remember, no investment goes straight up. We’re overdue for a correction in the gold market. I see any price weakness in the metal as an opportunity.

Where the Market Stands, Where It’s Headed:

The Dow Jones Industrial Average opens this morning up 9.7% for 2010. I predicted that the market would soon break its 52-week high and, yesterday, the markets delivered my wish.

All of a sudden, stocks are a good investment again. Well, it’s not really that they are a good investment; it’s just that investors do not have many alternatives to stocks. The bond market is in a bubble, real estate is still in the dumps. So it’s either stocks or gold, or both.

As I have been writing for months, at this point in the economic cycle, the best assets to own are either hard assets (gold, not real estate) or businesses that throw off plenty of hard cash flow. If you can’t own all those businesses outright, you can own their stocks.

The bear market rally that started in March of 2009 is alive and well.

What He Said:

“Partying Like a Drunken Sailor: The party continues. Stocks are making new highs and people are spending like there is no tomorrow. Why? I really don’t know. Big (cap) stocks, they just continue going up. Wall Street bonuses are at record levels. Popular consumer goods are flying off the shelves. Designer clothes, fast and expensive cars, restaurants with one-hour waits…people are spending in America today at an unbelievable clip. 1932, 1933…who remembers those years? The depression of the 1930s was the biggest bust of modern history. 2005, 2006, 2007…welcome to the biggest boom of the same period. When will it all end? Soon, my dear reader. Soon.” Michael Lombardi in PROFIT CONFIDENTIAL, February 7, 2007. Michael started talking about and predicting the financial catastrophe we started experiencing in 2008 long before anyone else